The Sounds of Bubbles Bursting

At the risk of sounding a bit negative, let me give you a bit of an update to explain why I haven’t added much here recently.

Bitcoin (and all crypto coins for that matter) appear to be a huge, huge, over-inflated bubble with nothing to support their real values.

There, I said it. Sucks to say it straight out, like admitting finally that you are an alcoholic or have a drug problem. The crypto currency world needs to step back from the “revolutionary blockchain distributed processing future money system” hype and have a look at itself. In the cold light of day, you are like the party people from the old Studio 54 days, totally happy and wild inside and totally disconnected from reality otherwise.

The simple fact is that bitcoin wasn’t built to work at it’s current price. The basic system works pretty well for payments provided that price of a coin is a couple of dollars. But at the current prices (even the chopped in half hovering around 11k price) it’s too expensive to use bitcoin to buy anything short of about the price of a car. Processing fees for payments have been upwards to $30 per transaction, and the delays so long the transactions are often forgotten before the payment makes it to the destination. It’s essentially useless to try to pay anything with bitcoin right now. In fact, more and more systems that were accepting Bitcoin for payments are removing it because it’s unreliable, slow, the values move too much, and the costs per transaction are too high.

Just like a hard partying person who wakes up alone in the morning covered in their own vomit, bitcoin supporters are starting to realize that all of the partying isn’t working out.

Just when the hangover looked like it couldn’t get worse, there is calls to regulate the party itself. South Korea is moving to remove the anonymous factors that make cryptos so popular. Russia is looking to ban certain things, China appears to be determined to shut Crypto mining and exchanges down completely, and many other countries are moving to regulate, control, or track the stuff. Everything that made crypto coins valuable in any sense is being undermined.

The days of euphoria and partying like it’s 1999 are likely over.

The next step, I suspect, is the slow decline. Bitcoin has survived the initial crash from the peak value of 20k. Currently the price hovers around 11k, and the futures market seems to point to this as being, at least for the moment, the point at which the party will stay. However, those who hold bitcoin are very likely right now evaluating their desire to “hold hold hold” or HODL, as it’s turned into. It’s very easy at this point to look at the longer term play and say “well, it might go up to 20k again, but it’s just as likely to sink to 5k”. That’s a good moment to sell at least some of your holdings and turn it into solid cash as opposed to ether. If that starts to happen, it becomes a bit of a self-fulfilling prophecy, as it will over time grind the market down.

The only thing saving bitcoin tight now is purely technical and sad at the same time. The number of bitcoins is limited. There are only 21 million coins. 1 million went to the creator and have never been traded. Over time, many more coins have been “lost” in wallets that cannot be recovered, on crashed hard drives, or reported stolen or lost from places like Mt Gox. The reality is that out of 21 million bitcoins, 17 million or so have been mined and a much smaller number of them are actually active and able to be traded. I would estimate that the real number of bitcoins “in play” is probably less than half of the total mined coins. So there may be some price support from “dead” coins, as they never get trades and as such, only a small percentage of all coins ever get sold. There will never be a 100% run on the bank because 50% of the coins can’t be used.

There is a downside to this, of course. The last 4 million or so coins that will be mined are likely to be more active. The actual number of active bitcoins (the ones that can trade) will nearly double. This should lead to even larger price fluctuations in the future, which is never good.

The funny thing is this: if even a small percentage of bitcoins are “lost” through wallet / hard drive / loss of paper backup each day, there is a point where effectively ALL bitcoins will be lost and unrecoverable. As I said, my guess is that nearly half of all bitcoins are “lost” or not able to be traded today. If that trend continues, given another 10 years or so, there may be very few bitcoins in actual circulation. There is a point where the currency could collapse though lack of activity.

The reality right now is that, for the moment at least, it’s almost too expensive to trade bitcoins, it’s almost too expensive to mine it, and the days of cheap Chinese power and mining farms is coming to an end. It that doesn’t burst the bubble, maybe this stuff will have a future!